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LONDON-Employers and insurers should start to assess what the risks might be if and when a single currency is implemented in the European Union, a report says.

There are less than 500 working days to go until the expected start Jan. 1, 1999, in Europe of the Economic and Monetary Union, which could give rise to the single currency, known as the "euro," on Jan. 1, 2002.

"Effective risk management means that businesses must identify the wide and diverse changes that need to be made to accommodate the euro," warned the Assn. of British Insurers late last month in its Quarterly Statistics and Research Review. "Many of these changes will have to be made within the three year transition period when the euro and national currencies are in operation simultaneously."

The ABI admits it is difficult to plan ahead for such an event, given there are still uncertainties over whether a move to a single currency will happen in the United Kingdom. However, the ABI has estimated the switchover could cost the British insurance industry as much as (British pounds) 1 billion ($1.62 billion), and "delays in planning can only increase this cost."

Policyholders most likely will bear some of the costs in the form of increased premiums, said a spokeswoman for the ABI.

However, the Assn. of Insurance & Risk Managers cannot comment on the effect the single currency will have on risk management issues in business because it "doesn't have a view" as yet, said an AIRMIC spokeswoman.

A single currency probably has advantages to a risk manager who wants to buy Pan-European insurance programs in one currency, said Hugh Loader, president of the Federation of European Risk Management Associations, the European risk managers association.

If your company buys insurance policies locally within each country, however, a single currency won't make much difference, he said.

But Mr. Loader can't see that there are any more risk exposures to businesses in Europe as a result of the currency switch.

Risk managers involved in the treasury function of their businesses may lose a risk because they won't have to hedge against the various currencies in Europe anymore, "but they equally lose an opportunity" to make money when hedging, Mr. Loader said. "But for more conventional risk managers, the discussion topic (of the euro) has fallen flat (because there) doesn't seem to be an exposure there."

The idea for monetary union and a single currency in Europe first was raised in the Maastricht Treaty on monetary, trade and political union adopted by EU nations in 1992. Since then, EU nations have been struggling to meet economic criteria established in the Maastricht Treaty that need to be met for the countries to join the EMU and establish a single currency. The currency will be called the euro.

Countries must meet the economic criteria this year in order to join the EMU. The euro then would be introduced over a three-year transition period starting on Jan. 1, 1999. The final date to introduce euro notes and coins into circulation would be Jan. 1, 2002.

According to the Maastricht Treaty, the United Kingdom can opt out of joining the EMU, and debates have been going on throughout the country over a common currency. The Bank of England over the past six months also has asked various parties how the euro will impact businesses depending on whether the United Kingdom is in or out.

Ultimately, it is a government decision whether the United Kingdom enters the EMU. The whole issue is proving a political hot potato in the run-up to the general election, which must be held by the beginning of May, and nobody is clear how and when the decision will be taken. Of all the EU nations, only the United Kingdom and Denmark are not committed to joining the EMU at some point.

Within the United Kingdom, there are calls for a referendum on the issue, but it may be decided by the government without public input. However, if the government decides to go ahead, like any other European country it will have to meet the "convergence criteria," covering factors such as long-term interest rates and sustainable inflation rates, before it can enter the EMU.

If it doesn't get in at the first opportunity, 1999, it still has the possibility of entering later. The participating member states for the initial phase will be chosen in spring 1998.

Financial markets in London have been very active in considering the impact of a single currency. However, "research conducted by the ABI suggests that many U.K. insurance companies are only now starting to realize the full implications of the euro for their business," the ABI said in the statistics and research review. "Very few companies appear to have researched the practical implications of a single currency on their business activities."

The key reason for this deferral in interest seems to be the "uncertainty surrounding the project. Companies are reluctant to commit significant resources to researching and planning until they know which countries will be in," said the ABI. "There is a trade-off between taking action now, which may be superfluous if the U.K. opts out, and the likelihood that costs will be higher if, as a result of the delay, less time is available for planning."

The ABI estimates it will cost the British insurance industry about (British pounds) 1 billion to convert British pounds to euros. This estimate is based on information from a small group of British insurers and estimates from other countries. The German insurance industry, for example, claims the cost of conversion for German insurers will be about 10% of non-personnel costs spread over a three-year period.

According to the ABI, the costs to British insurers would include:

Converting computer systems to accommodate the euro. Worries have already been expressed by insurers that database systems could not cope should the euro be designated by a three-letter symbol, such as EUR. If the euro is designated by a symbol, new keyboards or software applications would have to be purchased. Also, if systems have to hold both converted and unconverted data, storage capacity could be strained.

Making sure there is continuity among insurance contracts when currencies change. "Given that the U.K. conducts a large part of its business with the U.S. and other overseas countries, it is also important to ensure that the introduction of the euro does not invalidate third country contracts," said the ABI.

Reprinting costs, particularly as the printing industry will be heavily stretched to meet demand from other industries.

Anticipating the possible collapse of the euro, which is a "real possibility" during the transition phase.

While British insurers only now are starting to consider the real risks involved in a single currency, some companies, particularly in Germany and the Netherlands, are much further along in their state of readiness, said the ABI.

For example, an unnamed German insurance company has drawn up a full list of planning activities with a detailed estimate of the costs of joining the EMU. The company has conducted a full investigation into the information technology issues involved, including a full inventory of computer programs and data banks. This preparation has resulted in a five-year implementation plan with the estimated costs being spread over that time.

"It is difficult to plan for an event which is at least two years ahead, and where the effects on U.K. companies are uncertain," the ABI concluded. "However, if the U.K. were to go into EMU, a great deal

of planning and implementation

of change will be necessary (and some will be required even if the U.K. is out). The timescale for this is short."